Indian consumers have always had a strange fixation with gold. India's role in education, healthcare, infrastructure, global standing and other related economic factors are minimal. The poverty level in the country still remains quite high. But when it comes to buying gold, there is always money. In all, Indians buy about one-third of the gold that the world produces. In 2011, in-spite of gold prices being at record high, India was the top importer of gold.
Gold has been on a fantastic bull run. It has gone up by more than 500% over the past decade. And according to gold traders, prices of the yellow metal are not expected to fall anytime soon. Most of the gold traders have extended their long positions in the futures market. The main reason for their bullish outlook is the continuing decline of the rupee against the US dollar. Gold traders are also expecting demand to pick up as several marriages are lined up in next two months. They also believe that international gold prices will not come down due to the weaker than expected US GDP figures.
The rising gold prices are only likely to add to the woes of the country's foreign trade balance. India imported a whopping USD $33.8 bn in FY12, the biggest gold import bill in the world. According to Assocham's numbers, India imports about USD $350 bn worth of goods per year and gold imports, account for more than 11% of the total bill. In comparison, India exports only about USD $300-330 bn, including its non-goods exports of about USD $100 bn (most IT/BPO services) per year. Together with a rising oil bill of about USD $120 bn per year, rising gold prices are affecting India's import-export balance.
At these levels, gold imports are a huge burden on the balance of payments and accentuates the current account deficit. India's gold imports are unsustainable and the government should encourage channelising savings in formal financial instruments to increase productive capacity of the economy.